Sunday, January 31, 2010

Norilsk Nickel Metals Production Projection for 2010

Russia's Norilsk Nickel Mine (NILSY.PK) is the world's largest nickel mine, with its by-product palladium account for 45% of the world’s mine production.

Recent termination of Russian government palladium stockpile sale, due to depletion of the stockpile, is just one of the reasons why palladium has extremely bullish supply/demand fundamentals, and why palladium performed the best among all four precious metals in 2009.

Reduction of palladium production from Norilsk Mine could further restraint the supply, and may prompt major industry users to panic hoard like in 2000/2001.

One must correctly project Norilsk Nickel's 2010 metals production, to have an accurate picture of global platinum and palladium supply/demand outlook for 2010.

Norilsk's Russian operation has two divisions, the Polar Division, which produces platinum and palladium as by-products, and the Kola Division, which contains only nickel and copper.

The Polar Division proven reserve mineral ore contents are as following:

Ore TypeNi (%)Cu (%)Pt (g/ton)Pd (g/ton)Cu/Ni Ratio

There are mainly two types of ores, as disseminated is insignificant:

  1. Rich type, which is rich in nickel but poor in copper, platinum and palladium content.

  2. Cuprous type, the opposite, poor in nickel, but rich in copper, platinum and palladium.

In the past I pointed out that Norilsk was switching to the rich nickel ore to cut cost and increase nickel revenue, or simply due to the geology structure of the ore body being mined.

The effect of the production switch is that for the same amount of nickel, much less copper, platinum and palladium will be produced, as I predicted.

The data in the past two years and Norilsk’s own projection for 2010 have confirmed my prediction. The ore type switch can be closely monitored by looking at the Copper/Nickel production ratio and see how it changes over time.

Here are the Norilsk Nickel Russian production (Polar + Kola Divisions) over the years, plus 2010 projections:

YearNi (tons)Cu (tons)Pt (troy oz)±%Pd (troy oz)±%Cu/Ni

(* Based on Norilsk Nickel projection for 2010)

We are interested in palladium, so we want to see only the productions of the Polar Division. After subtracting the Kola Division, here are the numbers for the Polar Division:

YearNi (tons)Cu (tons)Pt (troy oz)±%Pd (troy oz)±%Cu/Ni

(* Based on Norilsk Nickel projection for 2010)

As shown in the chart, nickel production is maintained pretty flat over the years. However the copper/nickel ratio consistently dropped. The drop of the Cu/Ni ratio accelerated since 2008 and continues to go significantly down in 2010 projections.

As a result, I predict Norilsk’s palladium production in 2010 will not raise slightly as projected by Norilsk Nickel itself, but rather should continue to drop significantly from 2009 level, commensurate with the drop of copper/nickel production ratio.

I am predicting a palladium production level at 2.55M ounces for 2010, and platinum at 600K ounces level.

Is it ridiculous that people should believe my prediction, rather than Norilsk’s own prediction? From early 2008 on, based on my observation of the ore type switch, I insisted on my prediction of Norilsk palladium production at 2.7M level for 2008.

But Norilsk re-iterated, in its Q1 production release, that it’s on target to reach 2008 palladium production level at 3.02M to 3.07M ounces. In the Q2, 2008 report they still insisted that previous full year projections were unchanged. In Q3 they did not revise annual guidance either. When the final result of 2008 came out to be 2.7M ounces, I was right, Norilsk Nickel was wrong. Why would they insist on a wrong and overly optimistic guidance, is beyond me.

The bullish case of the global palladium market now looks even better.

Investors in the world’s only primary palladium producers, Stillwater Mining (SWC) and North American Palladium (PAL), will stands to profit from the expected palladium price surge in 2010.

After falling for a continuous 8 days for a healthy correction from recent high, it’s now time to buy back these two stocks, SWC and PAL.

Data sources:
Norilsk Nickel Company Web Page
Norilsk Nickel Production Result Releases
Norilsk Nickel 2009 Production and Projection for 2010
Norilsk Nickel Mineral Reserves and Resources Statement
Norilsk Nickel Mining Operations

Full Disclosure: The author hoards physical precious metal palladium, and hold large positions in SWC and PAL. 95% of my 401K account is in SWC and PAL.

Thursday, January 28, 2010

Unwinding of Currency Swap = Looming US Dollar Crisis!

The Daily Gold blogger Harvey Organ reports that ECB and other Central Banks are terminating the currency swap with the US Federal Reserve Bank as of Feb. 1, 2010. How they are going to unwind the currency swap is something very interesting to watch. It could finally trigger the long expected US dollar crisis: Collapse of the US treasury market and the US dollar itself.

In a currency swap, two central banks print their own currency out of thin air and swap them in a zero interest loan according to the exchange rate. Then after a period of time, they return the loaned currency to each other. For example the FED will loan US dollars to Bank of England (BOE) while BOE loans British Pounds to the FED. Upon the end of currency swap agreement, they unwind the trade by the BOE returning the US dollar, and the FED returning the British Pounds.

The question is how they are going to be able to unwind? The total swap is believed to be as high as US$500B. Some say as high as US$2T. If the central banks merely locked up the cash in a vault, they could easily return the money. But that would defeat the whole purpose of currency swap. Instead of being locked up in a vault, the swapped currency must have been SPENT in some way. Then the question is how do they get the money back if it is already spent, sold out or otherwise given away?

For example I long suspected where did the British get the money to buy US treasuries over recent times? According to latest official data, UK's holdings of US treasuries was up $145.1B in 12 months, while China's holdings went up only $76.4B.

Where did the UK get the money to buy US treasuries? Unlike China which earns US dollar from its trade surplus against the USA, The UK has a huge trade deficit against the USA. It spend US$2 buying US goods for each US$1 it earns selling products to the USA. Where did they get the US dollars to purchase US treasuries? If it was not from trade balance, it must be from the give out by the FED, in the name of currency swap. It cost UK nothing to print British pounds and then exchange for the dollar, just like it costs the FED nothing to print the dollars.

In a sense, FED is secretly buying our own debts through foreign hands, via the currency swap agreements!!!! Now, how is the currency swap going to be unwinded? What magic are they going to pull this time, asn the BOE has already SPEND out the US dollar in buying US treasuries. It does NOT have the money to return to the FED.

Likewise, probably the FED does not have the money to return to BOE either. They must have spent out the British Pounds as well as other foreign currencies, in repeated attempts to sell foreign currency and buy US dollars, to support the dollar, in recent times.

It's going to be fun to watch how the unwinding can be done. If my speculation is right, BOE must sell its holding of US treasuries to raise US dollar to unwind the loan, and the FED must also need to sell dollar and buy British Pounds to unwind its loan as well. Both would be fatal blow to the value of US treasury and US dollar.

Time to run to precious metals as your financial safe haven. Don't run to euro, as the eurozone is crumbling down. Don't run to Japanese yen. Japan has an even worse debt problem. When Japan collases under its debt it must sell US treasuries to salvage its own currency, which will trigger a domino effect leading to the fall of the dollar. The only thing safe are precious metals and commodities.

But unlike most other precious metal bugs I will not tell you to run to gold, or silver. Every one talks about gold as if it is the only safe haven. When every one talks about one thing, be careful. The world is not in shortage of gold. The world has plenty of gold that could easily lasts a couple thousand years if we do not produce gold any more. Warren Buffet famously critized gold by saying that you dig out the metal from the ground, and then dig another hole to hold up, and have to pay armed guards to watch it, what for?

I am also questioning the wisdom of silver investment. Silver bugs have been calling for silver shortage for years. But I never see any solid data to back up the claim of shortage. If there is no shortage, if a precious metal's price is only supported by investment demand, then there is a problem because anything that is purely supported by investment demand, is by definition a bubble, the investment demand could easily turn into investment supply in an instance.

The only good precious metal investment, must be one which is based on REAL industrial shortage, not by the hypothetical investment demand. If there is an industrial shortage, the price MUST go up regardless what investors believe. And price movement due to real shortage, on the other hand, can create solid and reliable investment demand. Such precious metals will provide the best performance way much better than gold.

The only two precious metals I see solid data to support a supply shortage case, are platinum and palladium. Of course my favorite is PALLADIUM. My most favorite mining stocks are Stllwater Mining (SWC) and North American Palladium (PAL), the only primary palladium producers. Russia's Norilsk Nickel (NILSY.PK) is world's largest palladium but they are mainly a nickel producer. South Africa's Anglo Platinum (AGPPY.PK) and Impala Platinum (IMPUY.PK) produces by-product palladium. Watching Platinum Today on related PGM metals news, and KITCO for price movements.

The parabolic price rally of palladium in the past one year, a performance that is far better than gold, silver and platinum, has vindicated my conviction on a palladium bull case.

Why palladium? FOUR things make palladium extremely bullish:

  • 1. Termination of Russian government palladium stockpile sale, due to stockpile depletion.

  • 2. Looming South African electricity crisis could strike again any time, just like two years ago.

  • 3. Launch of ETF Securities physical palladium fund (PALL) in the US market.

  • 4. Long term potential of palladium used in Cold Fusion, make it a must have strategic metal.

  • I have discussed these points in many of my past articles which I will not repeat. I merely needs to point out that Impala Platinum's PGM Supply Demand data confirms dramatic reduction in Russian palladium supply, as the stockpile sale has ended. There is now a big strictural deficit. Read more detailed discussions on GIM forums.

    I do not have to cover the recent launch of ETFS platinum and palladium funds, either.You can see the powerful price surge of palladium recently, and read what fellow SA contributors have to say:

    Why Gold ETFs Should Be Afraid of Platinum Cousins
    Platinum and Palladium ETFs: Dare They Outshine Gold?
    Platinum, Palladium ETFs Are a Home Run
    Pent-Up Demand Is Behind Platinum Fund's Success
    New ETFs Off to Roaring Start
    Don’t Blame Platinum, Palladium ETFs

      Sadly, even though people have caught attention to platinum and palladium. There has been absolutely NO mentioning of the end of the Russian palladium stockpile sale, and how palladium rallied from $300 to $1100 in 2000 merely because of a FALSE rumor related to the stockpile sale. Nobody mentioned the South African electricity crisis either, even it triggered quite a rally in PGM prices in early 2008, and another South African electricity crisis is looming again in the near future. Please read the background discussions.

      And yet most people don't even know about platinum and palladium. All they know is gold gold gold, silver silver silver.

      Let them have gold. I want to have palladium. And I can not own enough stocks of SWC and PAL. I have been predicting and advocating for a super bullish palladium rally for almost two years. No one paid attention until it really happens.

      But this is just the start! The real fun will begin when auto makers realize what's going on in Russia and South Africa, and start to panic hoard. If it were not for the foolishness of major industrial user like TOYOTA(TM), GM and FORD (F), rhodium would never see gigantic price swings from $300 to $11000. Shouldn't industrial users acquire and keep a plentifully large stockpile when rhodium was at $300, so they do not need to pay $11000 an ounce a few years later? They never learn.

      Full Disclosure: The author is heavily invested in palladium mining stocks SWC and PAL, and own PALL. The author owns silver mining stocks like CDE, SSRI, PAAS but have no interest in ETF funds GLD and SLV, as I do not trust their gold and silver holdings.